The consensus about the upcoming central bank digital currency (CBDC) by China is that it will challenge the status of the US dollar as the world’s reserve currency. However, a notable Chinese policymaker attempted to allay any such fears that people may have had about the digital yuan. Formerly the governor of the People’s Bank of China, Zhou Xiaochuan explained that China’s CBDC was not looking to usurp fiat currencies. According to the South China Morning Post (SCMP), the comments had been made by Zhou on Monday when he attended a conference. Talking about the efforts of the Chinese government regarding a digital yuan, the policymaker stated that the CBDC would only be just another alternative payment option.
He highlighted that the digital yuan would help improve remittances and settlements, along with fiat currencies and other private payment systems. Financial experts have become concerned over the pace of development of the Chinese digital currency. A lot of them have also called on the US government to enter the CBDC race, as the global hegemony of the dollar could be under threat by the digital yuan. However, Zhou noted that the dollar wouldn’t be jeopardized by the CBDC in any way. It was pointed out by the former chief of the central bank that even though this narrative had strengthened in the last few months, China should work on avoiding this perception.
Zhou also made comparisons with the Libra stablecoin by Facebook and claimed that traditional currencies wouldn’t be replaced by the digital yuan. He said that the CBDC could have a place in investments or trading, but it wouldn’t challenge any fiat currencies. Instead, he said that the purpose of using the digital yuan was to enhance accountability and transparency in the payments space. The asset will also boost foreign exchange and cross-border payments, areas where China is currently lagging. Even though Zhou has attempted to paint the Chinese CBDC as a friendly asset, the digital yuan has already ruffled some feathers in the United States.
The National Intelligence Director, John Ratcliffe had sent a letter to the Securities and Exchange Commission (SEC) last week regarding the national security threat posed by the digital yuan. According to the report, Ratcliffe offered to have his staff brief Jay Clayton, the Chairman of the SEC, about the national security issues that could surface due to China’s CBDC. Ratcliffe also said that another potential problem was the dominance of the country in crypto mining.
For decades, the dollar has held the position of being the global reserve currency and the greenback is used for settling most international trades. This allows the Federal Reserve to enjoy a great deal of flexibility when it comes to printing money, as there is significant demand for the currency outside of the United States. This reduces the possibility of hyperinflation. However, the dollar’s position in international trade could be threatened by the introduction of a successful digital yuan, as it might see a greater demand in the next few years.